SHANGHAI — The first-quarter outlook for China’s stainless steel market is upbeat despite rising supply.

The positive outlook is due to the current low inventories and a warming economy.

Stainless steel inventories in China have fallen to their lowest levels in two years, setting the stage for price increases. Stocks in the two main markets of Wuxi and Foshan plunged after producers were forced to cut production during the third-quarter 2012 market slump.

"Inventories in the Wuxi market are now around 170,000 tonnes compared with a record 300,000 tonnes in 2010," one analyst in Wuxi told AMM sister publication Steel First.

"Stainless steel prices dropped sharply after the October national holiday. Medium- and small-scaled steelmakers quickly reduced or halted their production," a source at a steelmaker in Shanghai said.

But with prices stabilizing at around 18,000 yuan ($2,884) per tonne since November, stainless steelmakers have been encouraged to restart production.

"Now that orders are stable, the utilization rates of most stainless steelmakers are close to 90 percent," the source said.

A nickel price recovery on the London Metal Exchange also boosted market confidence. The three-month contract closed at $17,720 per tonne Monday, up 11.8 percent from November’s low of $15,855 on Nov. 8.

Additionally, China’s economy has been recovering since the start of the fourth quarter.

A version of this article was first published by AMM sister publication Steel First.